I received an email from a reader this afternoon. Like anyone who invested in mutual funds for years, they discovered they weren’t making money. Surprise! They wrote how “Fed up with Mutual Funds” they were, but didn’t know how to get started in Dividend Investing.
There are so many questions for the new Dividend Investor. If you have been investing in mutual funds, then a lot of this can seem complex and overwhelming. But once you make the start you are well on the road to keeping your own money and getting paid regular dividends, instead of paying mutual fund managers and brokers. I’ve covered most of this in a previous article:
The Ninja Lessons
STEP 1: Read and Research
If you are going to be successful investing for yourself, then that means you are responsible for your own investment decisions. If you are new to the Dividend Investing game, then start reading and learning so you at least have an idea of the playing field. Here are some great resources to get you started:
STEP 2: Asset Allocation
I think the first starting point is to work out the percentages you want to invest in each asset class, rather than worrying about specific investments. The rule of thumb is to invest the percentage of your fixed income at your age, and the balance in stocks. So for example I am in my 40’s, so I keep 40% of my assets in bonds/ bond funds and fixed income, and 60% in stocks. This rule of thumb has worked very well for investors over the years. It reduces the risk as you get older, since you don’t have the time to recover from market crashes (like 2008) as you near retirement.
STEP 3: How Much Money Do You Have?
If you only have 5K to invest, then you can’t afford to buy individual stocks. Fees will whittle your profits. The less stocks you have, the more you will succumb to market movements. You wouldn’t want to have 50% of your portfolio in one stock, or all of your eggs all in one basket. The “experts” say you need to have 50K to get started, but I think that’s high. Let’s say you should have 25K before you even entertain buying individual stocks.
STEP 4: Build an Index Core
Instead of buying expensive and under-performing mutual funds, you can buy no-load index funds or ETF’s that simply track the market. These are No-commission and low MER (Management Expense Ratios) Funds and ETF’s that track the market index such as the TSE or DJIA, or even the Bond Markets. You won’t do any better than the market, but you won’t do any worse either. Use the Canadian Couch Potato strategy to get started.
STEP 5: Dividend Stock Investing
Once you have a core of Index Funds and ETF’s, you are ready to begin Dividend Stock Investing. Stick with big name brand companies! These big blue-chips give you money back (dividends) for owning them. These blue-chip and boring stocks are the “dividend aristocrats”. They are household name-brand companies that pay dividends of 3% to 5% or more per year, and have seen their share prices also increasing. Instead of a mutual fund charging you a commission, you get that money back as a dividend for becoming a shareholder.
As Derek Foster pointed out in one of his books, only invest in companies you understand. So for me I looked around the neighbourhood: Shoppers Drug Mart, Tim Horton’s, and Shaw Cable for my internet service etc. Money Sense Magazine makes the effort to screen good dividend stocks on a yearly basis, and provides many valuable and insightful articles.
One thing for sure timing is important. Many stocks have been trading at their 52 week highs since the run-up in the markets this year (2010). So a lot of stocks are expensive and they have downside potential. But no one can predict the future, so with a combination of Index Funds and Dividend Stocks you will do just fine. So invest prudently, and only invest in what you understand. For more Dividend Stock strategies, check out The Ninja Lessons.